While the drop in oil prices will likely cause Abu Dhabi's (Aa2 stable) economic growth to slow in 2015 and put an end to four consecutive years of double-digit fiscal surpluses, the emirate's sizeable stock of foreign assets will help cushion the impact of lower oil revenues in the coming years, Moody's Investors Service said in a report.
"Resources accumulated during years of high oil prices, and a prudent budgeting of oil proceeds, will mitigate the negative consequences of oil price volatility on Abu Dhabi's fiscal and external accounts," said Steven Hess, a New York-based analyst at Moody's.
The emirate has a sizeable stock of offshore assets in its off-budget investment vehicles, including in the sovereign wealth fund Abu Dhabi Investment Authority (ADIA), Abu Dhabi Investment Council, International Petroleum Investment Company (IPIC) and Mubadala. These exceed the total liabilities of Abu Dhabi government-related institutions and other emirate governments, according to Moody's.
"At the same time, growth in Abu Dhabi's economy, which remains largely dominated by the hydrocarbon sector, will remain volatile," continued Hess. "We estimate that real GDP will slow to below 3% from an estimated 4.1% in 2014, while the government will likely incur a fiscal deficit of 1.1% of GDP for 2015 after years of large surpluses."
If the period of low oil prices is prolonged, that could also lead to the crystallisation of contingent liabilities on the Abu Dhabi government's balance sheet and erode fiscal buffers, Moody's said, although it expects that the government will be able to finance fiscal deficits for several years if it liquidates assets. ADIA alone holds an estimated $498 bln in assets as of 2014.
Abu Dhabi's assets also comfortably cover its debt level, Moody's said. Including potential contingent liabilities related to government-related institutions, such as Abu Dhabi National Oil Company (TAQA) and IPIC, as well as other Abu Dhabi-related debt including the banking system, the emirate’s total debt represents 40.5% of GDP, or about $105 bln. Central government debt represents just 2.7% of GDP, limiting the emirate's liquidity risks.
The rating agency noted that Abu Dhabi's expenditures have been rising at a quick pace: between 2008 and 2013, spending increased at a compounded rate of 15%, mainly owing to an increase in federal services, including security and defence, and an increase in subsidies and transfers.
Moody's expects that Abu Dhabi will continue to derive the majority of its revenues from the oil sector, although authorities are making efforts to develop non-oil sectors, which at present account for 10% of government revenues.
The population has more than doubled over the past decade, contributing to the demand for housing and other services. However, while construction and real estate account for 13.7% of the emirate's economic activity, the economy's diversification has been slow: in 2014, non-oil sectors made up 49% of GDP, compared with 45% over the past decade.
Moody's also noted that Abu Dhabi is exposed to political risks stemming from regional tensions, but banking sector risk is low, with local banks showing a quick recovery from the global financial crisis and higher credit growth than in other emirates.
